13.19 Residual Income Valuation. The Coca-Cola Company is a global soft drink beverage company (ticker: KO) that is a primary and direct competitor with Starbucks. The data in Chapter 12's Exhibits 12.14, 12.15, and 12.16 (pages 806-809) include the actual amounts for 2013, 2014, and 2015 and projected amounts for Year +1 to Year +6 for the income statements, balance sheets, and statements of cash flows, respectively, for Coca-Cola. The market equity beta for Coca-Cola at the end of 2015 is 0.75. Assume that the risk-free inter- est rate is 3.0% and the market risk premium is 6.0%. Coca-Cola had 4,324 million shares out- standing at the end of 2015, when Coca-Cola's share price was $42.96. INCOME STATEMENT Exhibit 12.14 The Coca-Cola Company Income Statements for 2015 (Actual) and Year +1 through Year +6 (Projected) (amounts in millions; allow for rounding) (Problem 12.16) Actual Forecasts 2015 Year +1 Year +2 Year +3 Year +4 Year +5 Year +6 Revenues Cost of goods sold Gross Profit $44,294 $45,623 $46,992 $48,401 $49,853 $51,349 $52,889 (17,482) (18,021) (18,562) (19,118) (19,692) (20,283) (20,891) $26,812 $27,602 $28,430 $29,283 $30,161 $31,066 $31,998 Selling, general, and administrative expenses (16,427) (16,880) (17,387) (17,908) (18,446) (18,999) (19,569) Other operating expenses (1,657) (1,369) (1,410) (1,452) (1,496) (1,540) (1,587) Operating Profit $ 8,728 $ 9,353 $ 9,633 $ 9,922 $10,220 $10,527 $ 10,842 Interest income 613 606 623 642 661 681 Interest expense (856) (887) (910) (951) (993) (1,034) 701 (1,065) Income from equity affiliates 489 631 663 Other gains (losses) 631 0 0 696 0 731 0 767 0 790 0 Income before Tax $ 9,605 $ 9,702 Income tax expense (2,239) Net Income $ 7,366 (2,329) $ 7,374 $10,009 (2,402) $ 7,607 $10,309 $10,619 $10,940 $11,269 (2,474) (2,549) (2,626) (2,704) $ 7,835 $ 8,071 $ 8,315 $ 8,564 Net income attributable to noncontrolling interests (15) (32) (32) (32) (32) (32) (32) Net Income attributable to common shareholders $ 7,351 $ 7,342 $ 7,575 $ 7,803 $ 8,039 $ 8,283 $ 8,532 Other comprehensive income items (4,412) 0 0 0 0 0 0 Comprehensive Income $ 2,954 $ 7,342 $ 7,575 $ 7,803 $ 8,039 $ 8,283 $ 8,532 Source for Actuals: The Coca-Cola Company, Form 10-K for the Fiscal Year Ended December 31, 2015. Exhibit 12.15 The Coca-Cola Company Balance Sheets for 2015 (Actual) and Year +1 through Year +6 (Projected) (amounts in millions; allow for rounding) (Problem 12.16) Actual Forecasts 2015 Year +1 Year +2 Year +3 Year +4 Year +5 Year +6 ASSETS Cash and cash equivalents $ 7,309 $ 7,500 $ 7,725 $ 7,956 $ 8,195 $ 8,441 $ 8,694 Marketable securities 12,591 12,969 13,358 13,759 14,171 14,596 15,034 Accounts and notes receivable-net 3,941 4,375 4,506 4,641 4,780 4,924 5,072 Inventories 2,902 3,110 3,204 3,300 3,399 3,501 3,606 Prepaid expenses and other current assets 2,752 2,835 2,920 3,007 3,097 3,190 3,286 Assets held for sale 3,900 0 0 0 0 0 0 Current Assets $33,395 $30,788 $31,712 $32,663 $33,643 $ 34,652 $ 35,692 Investments in noncontrolled affiliates 12,318 12,934 13,581 14,260 14,973 15,721 16,193 Property, plant, and equipmentat cost 22,354 25,091 27,887 30,767 33,734 36,789 37,893 Accumulated depreciation (9,783) (11,612) (13,644) (15,887) (18,345) (21,026) (21,657) Amortizable intangible assets (net) 854 705 592 532 475 423 436 Goodwill 11,289 11,628 11,977 12,336 12,706 13,087 13,480 Other nonamortizable intangible assets 11,989 12,349 12,719 13,101 13,494 13,899 14,315 Other assets Total Assets LIABILITIES 7,677 7,907 8,145 8,389 8,641 8,900 $ 90,093 $89,790 $92,968 $96,161 $99,320 $102,445 9,167 $105,518 Accounts payable $ 2,795 $ 1,998 Current accrued expenses 6,865 7,071 $ 2,044 7,283 $ 2,106 7,502 $ 2,169 $ 2,234 $ 2,301 7,727 7,958 8,197 Notes payable and short-term debt 13,129 13,216 13,816 14,429 15,047 15,671 16,141 Current maturities of long-term debt 2,677 2,695 2,817 2,942 3,068 3,195 3,291 Income taxes payable 331 Liabilities held for sale 1,133 449 0 465 0 481 497 512 528 0 0 0 0 Current Liabilities $26,930 $25,429 $26,425 $27,459 $28,507 $ 29,571 $ 30,458 (Continued) Exhibit 12.15 (Continued) Actual Forecasts 2015 Year +1 Year +2 Year +3 Year +4 Year +5 Year +6 Long-term debt obligations Long-term accrued liabilities 28,407 28,596 29,894 31,219 32,557 33,907 34,924 4,301 4,430 4,563 4,700 4,841 4,986 5,136 Deferred tax liabilities-noncurrent 4,691 4,675 4,841 5,007 5,171 5,334 5,494 $64,329 $63,130 $65,723 $68,385 $71,076 $ 73,798 $ 76,012 Total Liabilities SHAREHOLDERS' EQUITY Common stock + Additional paid-in capital 15,776 15,723 16,279 16,839 17,392 17,939 18,477 Retained earnings 65,018 66,854 68,747 70,698 72,708 74,779 77,022 Accum. other comprehensive income (loss) (10,174) (10,174) (10,174) (10,174) (10,174) (10,174) (10,174) Treasury stock (45,066) (45,952) (47,818) (49,797) (51,892) (54,107) (56,035) Total Common Shareholders' Equity $25,554 $26,451 $27,035 $27,566 $28,033 $ 28,437 $ 29,290 Noncontrolling interests 210 210 210 210 210 210 216 Total Equity $25,764 $26,661 $27,245 $27,776 $28,243 $ 28,647 Total Liabilities and Equities $90,093 $89,790 $92,968 $96,161 $99,320 $102,445 $ 29,506 $105,518 Source for Actuals: The Coca-Cola Company, Form 10-K for the Fiscal Year Ended December 31, 2015. Exhibit 12.16 The Coca-Cola Company Projected Implied Statements of Cash Flows for Year +1 through Year +6 (amounts in millions; allow for rounding) (Problem 12.16) Forecasts Year +1 Year +2 Year +3 Year +4 Year +5 Year +6 Net Income Add back depreciation expense (net) Decrease in receivables-net Decrease in inventories Decrease in prepaid expenses Decrease in other current assets Increase in accounts payable-trade Increase in current accrued liabilities Increase in income taxes payable Increase in other current liabilities Net change in deferred tax assets and liabilities $ 7,374 $ 7,607 $ 7,835 $ 8,071 1,829 2,032 2,242 2,459 $ 8,315 2,681 $ 8,564 631 (434) (131) (135) (139) (143) (148) (208) (93) (96) (99) (102) (105) (83) (85) (88) (90) (93) (96) 3,900 0 0 0 0 0 (797) 47 61 63 65 67 206 212 218 225 232 239 118 16 16 16 16 15 (1,133) 0 0 0 0 0 (16) 165 166 164 163 160 Increase in long-term accrued liabilities Net Cash Flows from Operations 129 133 137 141 145 150 $10,885 $ 9,903 $10,357 $10,810 $11,278 $9,477 Decrease in property, plant, & equip. at cost (2,737) (2,796) (2,880) (2,966) (3,055) (1,104) Decrease in marketable securities (378) (389) (401) (413) (425) (438) Decrease in investment securities (616) (647) (679) (713) (749) (472) Decrease in amortizable intangible assets (net) Decrease in goodwill and nonamort. 149 113 60 57 52 (13) intangibles (698) (719) (741) (763) (786) (810) Decrease in other noncurrent assets (230) (237) (244) (252) (259) (267) Net Cash Flows from Investing Activities $ (4,511) $(4,675) $ (4,885) $ (5,050) $ (5,222) $(3,102) Increase in short-term debt 105 722 738 744 751 566 Increase in long-term debt Increase in common stock + paid-in capital 189 1,298 1,326 1,338 1,350 1,017 (53) 556 559 553 547 538 Increase in accumulated OCI Increase in treasury stock 0 0 0 0 0 (886) (1,866) (1,979) Dividends (5,507) (5,682) (5,853) (6,212) Increase in noncontrolling interests (32) Net Cash Flows from Financing Activities $ (6,183) (32) $(5,002) (32) $ (5,241) Net Change in Cash $ 191 $ 225 $ 232 $ (5,522) $ 239 (2,096) (6,029) (32) $ (5,810) $ 246 (26) $(6,122) $ 253 (2,214) 0 (1,928) (6,288) (32) Part I-Computing Coca-Cola's Share Value Using the Residual Income Valuation Approach a. Use the CAPM to compute the required rate of return on common equity capital for Coca-Cola. b. Derive the projected residual income for Coca-Cola for Years +1 through +6 based on the projected financial statements. The financial statement forecasts for Year +6 assume that Coca-Cola will experience a steady-state, long-run growth rate of 3% in Year +6 and beyond